AT&T-Time Warner deal may be just the first domino

Harry Potter, Anthony Bourdain, Superman, Bill Simmons and Charles Barkley are all going to work for a phone company.

AT&T’s planned $85.4 billion acquisition of Time Warner, the New York-based company that owns HBO, CNN, TNT and Warner Bros. film studio, is a huge domino falling in the content business. The deal, which creates a media powerhouse and comes with promises of innovation and cost-savings, will make competitors in the wireless and Internet space like T-Mobile, Sprint and Verizon uneasy.

The move could also set off a new wave of telecommunications companies and Internet giants, such as Google and Apple, buying or making deals with popular content programmers, further blurring the boundaries among the industries. In fact, Apple has been rumored for months to be a potential acquirer of Time Warner. And Google's interest in buying more premium entertainment content, such as the right to stream NFL games, has been widely reported. Other cable network operators that also could be potential takeover targets, to name a few, include: AMC Networks, best-known for its top-rated TV show The Walking Dead but which also owns BBC America and SundanceTV; and Discovery Communications, which owns and operates Discovery Channel, The Learning Channel, Animal Planet and OWN, in a joint venture network with Oprah Winfrey.

The merger, which marries partners in distribution and content, will surely trigger multiple layers of complexity for customers, industry regulators, investors and consumer watchdogs as they sort out revenue possibilities and conflicts of interest. But competitors of Time Warner or AT&T can no longer to afford to stand by idly.

Time Warner’s Chairman and CEO Jeff Bewkes intimated as much, saying the deal was partly to get ahead of competitors. “You’re going to see all kinds of distributors following,” he said in a press conference call with reporters Saturday night. “And you’re going to see a kind of revolution in the TV world.”

Telecom providers have been shopping for content companies to acquire as their wireless smartphone and broadband Internet service markets mature. "As upside from data usage seems to be increasingly capped, we would not be surprised if other distributors were to potentially embrace larger opportunities in the content arena over time," said Barclays Equity Research analysts Kannan Venkateshwar and Amir Rozwadowski in a recent note to investors.

Ownership of Time Warner’s content – including Harry Potter movies, DC Entertainment films, whose franchises include Superman, Batman and Wonder Woman, CNN, NBA basketball on TNT, MLB baseball on TBS, and HBO’s critically acclaimed shows, like Game of Thrones -- guarantees that AT&T can make those programs available on its DirecTV satellite TV service. AT&T can also stream those shows to its Net-delivered and wireless DirecTV-branded streaming services in the works. AT&T bought DirecTV last year for $48.5 billion.

With more consumers streaming on their mobile devices, Bewkes, whose company had been wooed by others, pulled the trigger on the deal largely because he was drawn to the idea of delivering his content to consumers on “a multiplatform basis,” he said.

Beyond that, AT&T also gets revenue by licensing those movies and TV series to other pay-TV providers and subscription Net TV services such as Netflix. "Video and entertainment will remain the key driver for the future of consumer-oriented services," said Brett Sappington, senior director of research at Parks Associates. "Video, virtual reality, and other entertainment experiences are data hungry. They will be the experiences that push consumers to higher tiers of broadband or mobile data."

Owning content also helps pay-TV providers to avoid costly conflicts over the escalating prices they pay to carry programming, he said. "With content costs continuing to increase, operators are expecting more such conflicts in the future. So, ensuring access to popular content certainly helps AT&T," Sappington said.

Moreover, Time Warner's networks, particularly HBO and TNT, fetch some of the highest fees for pay-TV providers. After closing the acquisition, AT&T-DirecTV will not have to pay for Time Warner's content and will be in position to dictate the financial and legal terms of Time Warner's negotiations with other cable competitors.

Comcast's acquisition of NBC Universal in 2011 foreshadowed AT&T-Time Warner deal. And regulators’ approval of the deal and Comcast’s continued profitability from its business diversity have emboldened its pay-TV competitors. Since then, Comcast also acquired DreamWorks Animation in April for $3.8 billion.

Verizon's announced July purchase of Yahoo for $4.83 billion -- and its May 2015 $4.4 billion deal for AOL -- involved content, as well as Internet advertising, making it "a case of buying what it needed to better monetize the data its network produces," said analyst Brian Wieser of Pivotal Research.

"Any media company without a controlling shareholder and other than Disney (because of size) could be a target," Wieser said.

CBS and Viacom, despite the recent turmoil surrounding management, could be targets. The controlling shareholders of both companies – principally, billionaire media mogul Sumner Redstone and his daughter, Shari Redstone – have called on the two companies to merge. With a combined market cap of more than $40 billion, a CBS-Viacom would hold not only CBS' various networks including Showtime, but also Viacom's assets such as Paramount, BET, Comedy Central, MTV and VH1. If the merger occurs, it would possess the No. 1 primetime broadcast network and collectively the most number of cable TV viewers.

Other standalone media companies, such as AMC, Discovery and Scripps, which owns HGTV and Food Network, will be constant subjects of merger speculation.

Meanwhile, Time Warner, until the acquisition is closed, could continue to be the subject of a possible bidding war. But only a few companies have the financial wherewithal to pull it off. "It seems unlikely at the price AT&T is offering,” Wieser said.

As the telecom-media landscape turns, regulators will have their hands full. AT&T's Chairman and CEO Randall Stephenson told reporters that he doesn't see difficulty in passing regulatory muster since he's buying a "supplier," or in business parlance, a deal of "vertical integration." Anti-trust regulators have been typically more concerned with horizontal integration deals, in which a company buys a rival and gain greater market share.

Still, given the size of the deal, regulators will hardly rubber-stamp their approval. They did put some conditions on Comcast's acquisition of NBC Universal -- a similar case of vertical integration -- and the same would likely happen here, Sappington says. "The fact that AT&T is not one of the two largest pay-TV providers in the U.S. market will help," he said. "It makes it more difficult for opponents to claim a monopolistic advantage for AT&T in this merger."